Episode 5: Is this the end of the Mac?

Rod Drury and Gary Turner are back with another electric episode of The Rod & Gary Show. This month, they’re dissecting the recent announcements coming out of Apple’s 2017 WWDC conference, and you don’t want to miss the debate that ensues! Is this the end of the Mac? Are Apple’s productivity tools still relevant? Rod and Gary have some strong opinions about these questions and more.

Plus, Rod goes into Xero’s humble beginnings and reflects on why going public in the first year of operation – with only 100 customers – was the right move. Fast forward ten years later and more than one million customers – yup, he definitely got it right.

Tune into this episode to hear more on the initial IPO, how Apple is taking steps to block tracking, and the photo application that Rod calls “slightly creepy.”

Episode transcript

Hosts:
Rod Drury
Gary Turner

Gary: Hi Rod. It's been a week since I was in New Zealand, time flies. But we had a whole bunch of people in Wellington for some strategy plannings and some meetings, but also coincided with the 10th anniversary of the IPO when Xero put its initial public offering on the New Zealand stock exchange. Any observations 10 years down the line, about that?

Rod: Hey Gary, it was great to see you last week, and all of the UK team that came across. For those listening out there, we had our first what we call, Xero week, where we bring a hundred leaders of the business, all down into New Zealand, and we're about 1700 people. So that seemed like a big deal. It was kind of sad we couldn't get the whole team there. Perhaps we can just ask all our customers to allow us to turn the servers off for a week so we can all travel together, but probably not that likely. It was really good having everyone there and sharing, because we spent so much time working out of the Hangouts, and seeing people in little square boxes at the bottom of the screen, but to get that leadership all together to build up those real connections, was incredibly valuable.

Gary: It was. I think I made the remark that there's no replacement for face to face engagement. We are massive users of Google Hangouts as a productivity tool, which is cool, but I think that we should perhaps Hangout less and hangout more because there's no replacement for just being in the same room as your work colleagues sometimes. It was great.

Rod: Yeah for sure. So, again it was a very special week last week as well. We had a bunch of staff that have been with Xero for 10 years now. So as is our growing tradition, we had our 10 year lunch. That was a fairly hilarious few hours reminiscing back to the those very early days of the business. You know, four people in a small apartment. Of course, over the last week being 10 years since our IPO, we talked a lot about what those early days were like, and why did we IPO our business so early? So the main kind of reason was, the last business I had, I had an email archiving company called After Mail. When we sold that, it gave us the capital to do Xero, but when we had After Mail, we had about 25 staff and everyone was doing four or five jobs.

When we started looking at doing small business accounting software, and building a global platform, we figured we needed about 50 people. By the time you have 10 developers, 10 testers, you have some sales people, then you might need some HR people, and some marketers. You need to build a customer care team. It quickly added up to about 50 people and that was around half a million dollars of salaries a month. We figured we'd need probably three years worth of capital, so we could build the product, get our first customers.

We sort of estimated around 15 million dollars and back at those days in New Zealand, probably the biggest venture capital deal was two or three million, and asking for 15, really just wasn't going to happen. We probably could have raised 15 million on the US West Coast, but then we would have had a valuation say of 25, and VC's would have owned probably more than half the business, and it would have been for sale quite quickly. What we did was sort of quite rare. We were one of the first tech companies to do it, but we told a big story. We said look, "We've got some great people with lots of prior business experience, here's a really good idea."

It gave us 15 million worth of capital, it is risky, but it will give us the chance to build something, which is quite significant. So, we listed actually, within our first year of starting and we had around a hundred customers. When we started doing the kind of early road shows, we probably had 20 or 30, and our promise was, we'd have a hundred customers by the IPO. Then our prospectus document, our goal for the first year was around 1200 customers. Back in those early days I remember we'd get sort of, when we got one customer per day, that was pretty exciting. One day we got three in a day, and that was huge. It was pretty interesting times, and we did actually manage to float the company.

Within that first year, we raised our 15 million, we did it on a 55 million dollar valuation, which meant we gave away about 27% of the company, so it was still very tightly held. Then we've really been doing a start-up in the public eye for the last 10 years. As we've talked about before, over the last few months passing that million customer milestone, just seems like such a long, long way from all of that early investment back in the early days.

Gary: Yeah. I remember I think, the first time I heard of Xero, so 10 years ago I was in between roles. I had just left my Managing Director job at Pegasus, a PC accounting software business, where I'd been for a few years, and was just about to join Microsoft, because, A, I had always had Microsoft in my kind of career bucket list. Always kind of grew up in a Microsoft world and thought, that if the cloud, and enterprise and accounting, was going to happen anywhere, it might well happen at Microsoft. So, I was about to jump into Microsoft just as you were doing the IPO in New Zealand.

I think I first heard of Xero in 2008, up in the UK. What was remarkable about that was, I think it's the first time I was aware of a New Zealand software company achieving anything like global scale. I know it was very early obviously, even like in the first year after the IPO. What was obvious to me in 2008, when I was at Microsoft kind of looking in from the outside, was the maturity of even things like, brand, vision, the tone of voice. The kind of voice of the business was very contemporary for that time. Very different from established enterprise so, for businesses.

I think I kind of marked your card while I was at Microsoft thinking, "That's really interesting that little Kiwi business", and kept an eye on it, and obviously it's grown since. I think I jumped out of Microsoft eight years ago thinking I'm bored in the UK. So, it's been an incredible time, when you think that 10 years ago, Xero had a hundred customers, and most of them were probably related to you, or neighbors. Just a few months back we passed by the million subscriber mark, which in a decade is incredible.

It just speaks to the economics of building a business now, in this internet age, and the importance of having a vision and clarity of where you want to go, and how you want to do it. Actually, regardless of where you are, if you tick those boxes, and you have perseverance, and great people, then you can achieve something pretty significant.

So, it was great to get together last week, and reflect on some of that, but increasingly I think we see the way it's all going in the next few years is quite different to perhaps the last 10. It has been an incredible PA to be involved with Xero, and I'm real excited about some of the stuff I saw last week. The team showed us on some of the machine learning that we're now embedding into the product. I think that's going to architect, put a different experience for people in the next decade, but yeah, exciting times.

Rod: I think one of the ... I'm really pleased you mentioned that about the business looking pretty sophisticated, so one of the things about Xero, as it was my third or fourth business. So, Xero I started when I was 40, and a lot of people think that start-ups are all done by people that are in their twenties. I think in business software, having years of writing other business software, of working for Ernst & Young doing software implementation, you actually have a huge amount of experience. I think what's been really cool and why I really liked doing Xero as a public company, is it gives you the resources to execute really big strategy.

So, we did raise 15 million in our IPO. At the end we were able to use strategic placements to raise quite a lot of capital over our lifetime. We've raised well over 400 million dollars, well over 200 million pounds. So we've always been really well resourced, which has allowed us to really implement strategy and do things. So this next generation of accounting where we move towards code free, using AI, machine learning, all of those great things, is super exciting because we have the resources to do that. I think what we've demonstrated over 10 years, is having the patience to build that core kind of systems of record, that global platform so you have the data. Now we're in this incredibly exciting period where we get to redefine how accounting works, for the next generation of businesses.

Gary: I was reading the Merrymaker internet trends report that came out last week. So, Merrymaker is an analyst and partner to Kleiner Perkins who are probably the biggest VC firm and tech, if not the biggest one, one of the biggest. They've been around forever and kind of basically built Silicon Valley, over the last 40 years, but Merrymaker publishes an annual report called Internet Trends. It runs through something like two or three hundred slides that she delivers it at whatever event she happens to be at every year. She was talking about how if you look at the last decade, or even just the last five years, the growth that we've seen in some of the largest businesses in the world.

So the top five largest companies in the world are technology companies, and something like 40% of the top 20 companies in the world are technology companies. Even as recently as five years ago, that wasn't the case. She then breaks down, if you look at Apple or Amazon, or Google, they're no longer known for what they started off as. Google was a search engine, Amazon sold books, Apple made PCs, and they've managed to diversify. I guess in recent years, not so much with Apple, but have all been pretty strong founder led organizations over the last twenty years, and have been able to do that founder thing of seeing around corners seeing where it's going next.

I think that if you're building a business, and you then bring in VC money, or you can look down their original founder vision, then I think you lose some of that ability to see around the corner, to see what the next big things are. If things like Amazon, and Jeff Bezos are anything to go by, it's a hell of a different business from selling books 20 odd years ago. I don't think Amazon would be the business it is, or Google or Apple, or anything, if it wasn't for that. That persistent vision from the leadership and being able to see where it's going next. Otherwise, you're just this kind of, once single generation opportunistic business that happens to see an opportunity to build something, and didn't have a follow up plan once they'd done that.

That's what makes it so exciting to be in this industry, but to be in this industry right now, is the ability to kind of, write the rule book as we go. So, yeah, fun times.

Rod: Yeah. So much. Hey, the other big exciting thing, obviously we had the annual Apple WorldWide Developers conference, WWDC. I do find though I'm getting a little bit less interested in these, and I kind of love my phone, so I didn't wake up at 5 o'clock to watch it, but I did start watching the stream after I did wake up. There were a few kind of interesting things. What were your big takeaways Gary?

Gary: I was really interested in ... so, they had six announcements. I think one of them was Apple TV, which is pretty pointless. Obviously a new version of Mac OS High Sierra. I know you've got some opinions on that, so I'll come back to that one. iOS 11 looks like it's just maturing incredibly quickly. The new kind of iPad Pro form factor, and this whole thing about the future of mobile productivity no longer being a conventional laptop. Then obviously the iMac Pro and a couple of other things on the watch.

So for me, the iMac Pro I think was really interesting. I know that your view is that all of the innovation seems to be going into iOS, and not into Mac OS. Therefore, the implication for that is that there's possibly ... well, are we coming to the end of Mac OS in terms of a viable platform. That then is contradicted by the investment and the iMac Pro, and obviously they have some new Mac Pro stuff coming down the line.

So, what's your take? I thought it was interesting. I thought iOS 11, looked amazing, but I know you have some thoughts about the lack of innovation at least, apparent lack of innovation in Mac OS?

Rod: Yeah. So this was kind of amazing when you think about the resources that we have and we sort of, bleed every software engineer, and think we'd love to have twice as many. You look at our resources compared to the massive resources that Apple has available, and the massive amount of cash, what seems to have happened, and they've sort of said this over the last few years. They keep taking people off Mac OS to move it on to iOS, and I think that's just a straight volume game. Obviously they sell a lot of phones, they sell a huge amount of iPads, and yet they're maintaining two operating systems to send it from the same tree, but with an iOS, it's an instant on, operating system. It's far more controlled. It's not like the wild west, we can do anything on it. It is a much more simplified and constrained experience.

I was watching the mobile phone parts of iOS, and it was like, "Oh yeah, interesting. That'd be nice." But nothing really game changing. Then when they went on to demo the iPad version, now doing drag and drop, the multi-window support. So, you start asking yourself, " Wow, comparing with the lack of really new customer facing stuff, that was a Mac OS, and you could just tell, there wasn't a huge amount of engineering time put into that, and they pretty much said that themselves.

Compared to all of that windowing things you expect from a sophisticated operating system, now on the iPad version of iOS, it seemed pretty clear to me that we can't be too far away from having, always on, basically very large desktop screen, probably with touch, where you just turn it on. For them it must be compelling because if they can spend their development resource on one operating system, that's obviously going to drive margin, which Apple is very, very good at.

The only things really missing is proper mouse support, and I was kind of disappointed they didn't have the multi-user thing kind of worked out either. You add those two things and they're pretty much there. For 99% of users around the world, they'd be pretty happy with a big screen iOS experience.

Gary: I think you're right. I've listened to a couple of podcasts on WWDC, and I've read a couple of reviews. I think my take from reading and watching the presentations, is that, Apple is obviously a multi-platform business. So, you've got mobile, and iOS, and the whole kind of UX, and the way that operates is very different from conventional desktop experience.

You've got the iPad, which when you think the iPad ... when was that? Is that seven years ago, so May 2010. Remember the reaction to iPad when it first came out was, well it's just like a big iPhone. That I think speaks to our lack of sophistication of really understanding different use cases for new form factors. It just looked like a big touch device, but in the seven years since the iPad was launched, well factually it's a slate and it kind of looks the same as it did seven years ago, albeit, significantly more powerful and thinner, and high res screens and things.

Actually the iPad hasn't fundamentally changed in its appearance in seven years. But iOS has changed considerably, and it has matured to the point where I think you do now have this viable, almost to 100% viable alternative to a PC, for somebody sitting at a desk using productivity apps, and actually for something she could argue that an iPad is more suitable. Certainly more portable when you've got more balance in it and things like that.

Then, you've got the specialist uses that I still think that iOS will fail to keep up with. So, designers, high end video production, 3D rendering. Anything significantly more sophisticated in a creative sense. So I think for me, it breaks down to, mobile as a platform? Absolutely for iOS. You've got an increasing debate that says you don't need a PC and a conventional clamshell notebook design with Mac OS to do productivity, you can actually do that better on an iPad. I think that category will flip, but I don't think it means the end of the Mac. I think you've then got this other third category, which is people that are in a studio.

So whether that's a design studio or video studio, or some other kind of creative studio, they're still going to need a very high end performance. They're going to need huge screens, they might want multiple screens. They might want fine granularity of a touch pad or a mouse, and like granular control of a 100 keyboard. So, I think what we've got is that productivity slot in the middle. Absolutely you could argue in a couple of years, you won't be buying a MacBook, you'll just go for an iPad, if you're a productivity desk worker. I think rather than that meaning the end of the Mac, I think that studio category with the Pro apps, and the Pro user, is I think here for a long time because I don't see iOS getting to that level yet. So big gulf in productivity to studio work.

Rod: Yeah Gary, I completely agree because you already have to use Mac OS, to build iOS applications. A really clear signal will be once they have iOS developer tools on iOS, then hey, the end maybe nigh. What I think what we will see exactly as we're starting to see now with this new space gray, $5,000 dollar iMac, is that the iMac and those tools become much more workstation.

There's a few kind of interesting clues. Remember if you're running iOS, you're all on Apple hardware and the investment they've been making in their chips, and all those things, means they're much more of the value chain and a much more higher margin. There's no moving parts or, and those sort of things. Also, if you look back at their productivity tools, your iWork suite, and the iLife suite, Photos and things.

Remember three or four years ago, they basically broke the old versions and then the iOS versions came out and then what they did was, give us really basic versions built on that iOS code base, and then they started adding the features back. There hasn't been a lot of investment in their productivity tools, and their iLife tools. Those all seem to be on iOS. So, I think, yes there will always be a Mac OS market for those creators, but it'll be more high end workstation products, but it won't be core money it is for the creators market. They will make much, much more money by having an iOS version and an iMac form factor, where those are incredibly high margin devices.

So I do think we'll see both. The frustration this is, Apple is very much this kind of vertically integrated ecosystem, but we're starting to see now I think especially in the enterprise space, where they haven't been investing in enterprise class productivity tools. So, most of my apps, even on iOS now, are the Google suite, because I need to talk to Gmail, and some people will talk to exchange servers, and the large enterprise. The Apple products really, most business users I see, aren't using those productivity tools.

If you end up that you're in the Apple ecosystem, with experiences that aren't as good as if you're fully in, as a consumer. So, I think that's an unresolved thing. It also came clear with the new HomePod, which was a wall garden music service, which was really interesting. You can understand all the energy going on there, but they needed to be there, but because Apple hasn't had that massive investment, and their data backend, the years that Google have had to know about all of your data, you don't have a very good intelligent assistant experience with Siri yet, compared to what's happening with Echo and Google home. Also, that very expensive speaker is locked up with an Apple music subscription.

It's interesting, where at this really big tension between Apple, as beautiful hardware experience, the base software being quite good, but they haven't invested enough in enterprise software. I would have thought they would have done iMessenger Android. You know, you're seeing messaging now bleeding towards WhatsApp, because of that cross platform. There is so many more people on Android now, so I just wonder if they got their strategy right. What are your thoughts on that?

Gary: I haven't used the Mac OS productivity apps for years now. You can easily configure the mail app and the calendar app, to work with Google or Office 365, or whichever other backend productivity suite you're using. But, it feels like the old world of software. It feels like a function of Apple's desire to maintain that tight vertical integration. They don't want to give up that productivity element. They don't want to seed that to anyone else, and it's almost like they're trying to lock you back into their iOS.

I mean, if you look at the mail app, or calendar, they're kind of like, almost, I'll be generous to say 10 year old interface design examples. Possibly even older than that. We're talking about the concept of a mail app that is a slightly more functional version of Microsoft Outlook from 20 years ago. I mean it's not really moved on and it doesn't have the kind of dynamic flexibility, or some of the new UX conventions you'll see and things like Google inbox.

It's surprising that they haven't broken away from that older paradigm yet. They could easily build on iCloud, a really rich and sophisticated set of productivity products, that embody, and can challenge what you can do on Google or Microsoft's productivity stack, but they haven't done so. Not only that, if you look at the relative lack of innovation that you've seen in things like mail, and calendar, compared with the innovation that you see in other consumer apps. So, you could argue that the Photos app, you replace them for iPhoto is significantly clever or cleverer, and it has machine learning facial recognition. All the kind of contemporary things you would expect from a Photo app platform.

There are things you can do with Garage Band and Logic, and Final Cut, so they're absolutely spending money on innovation and they're creative productivity platforms, but almost zero on their desktop apps, and the very fact that they're still local runtime desktop apps, it just feels like anachronistic in 2017. I can't really work it out.

Rod: Yeah, and so you're left with this compromised experience so, I've moved from Apple music to Spotify. I love the freedom of that, so that's broken the iTunes relationship. I haven't quite got the Photos yet, but the main reason is that, and this kind of blows me away as well, so Google hasn't thought, okay, give me a guide that shows me how Photos work on an iPhone? How I move my iPhoto from iPhoto to Google Photos. I mean, I do find Google Photo slightly creepy in that you know it knows everywhere you've been, and with whom. They also are cataloging once you put your face in and those sort of things, and they know it's you, some friends were telling me that you get asked the question, "Do you want to allow yourself to be tagged in other people’s Photos?" That sort of database that they have, is actually kind of frightening, but the usability of it looks fantastic.

It's just that Google haven't done that user experience to show a by step guide, and what the end experience will be for you to make that transition, but someone will write that over the next year or so. It would be fantastic if there was a server to server conversion service, then I'd probably use that straight away. What I think you do now is you have to try and download all of your Photos from iCloud into iPhoto, or onto your local desktop, and then use the Google uploader, which may take like a whole week to run those things through. I think it's still too hard but you can imagine how that could be solved quite quickly.

Still, you know, there isn't really an Android iPad thing that's got really popular, and I still want a really nice big desktop, and I don't really want to go back to Windows. So I think where I've got to, is I'm kind of resigned that it's kind of nice Apple hardware with some nice web based applications. My productivity ones from Google. There'll be still a few jarring experiences but no one solved the problem. There's no one, no brainer solution, which works for all people, which is crazy now 30 years into enterprise IT.

Gary: Yeah and I think actually your comment there about the whole kind of creepiness of some services, reminded me of the other interesting thing at WWDC, which was the kind of tracking management they're building into the next version of Safari on High Sierra on a Mac. In short form, the ability to control or block trackers when you visit a website. The annoying thing is, you're in the market for a new speaker, and you go and search a couple of websites for a new speaker. Then wherever you go for the rest of that kind of browsing section or longer, other websites, you'll see banner ads trying to sell you speakers, which is really creepy actually.

It's a bit like, I was listening to Accidental Tech podcast, or John Gruber's talk show this week, and the equivalent of that kind of advertising tracking in a browser, and we're generally, we just allow it to happen. It's like walking into an electrical department store and looking at Hifi's and looking at TV's and then walking into another one, and the minute you walk in, the guy from the TV department comes up and immediately says, "Oh, you're looking for a 60 inch, LED screen and here's what we have." That would be weird if it happened in real life, but we allow that to happen in browsers.

The work that they're doing in the next version of Safari, to try and circumvent and effectively block that tracking behavior that so many businesses are actually using. I think that also is connected up with one of the fundamental differences between Apple and Google, is that Apple have this real strong line on privacy. Whether it's the differential privacy methodologies they're using, they're storing your data. It's your data. They couldn't actually look at your data even if they wanted to, because of the way the algorithms and their cloud storage operate, and the secure check that they have on the iPhones and everything else. That's very different to that very open landscape from privacy that Google have employed certainly since some of these things like Gmail, and obviously on the Photos right now.

So, I think that's an interesting thing that we'll see how that plays out between Apple and Google, and those big guys. If Apple are certainly behind on innovation on productivity apps, I think they are taking an admiral and advanced view on protecting privacy and not compromising user experience. Not compromising your relationship with Apple because of sharing your data and their ability to try and monetize that, and they're really clear they don't want to do that.

Rod: Yeah, so I actually see that quite differently. I reckon that all about Facebook, and all about Google. So, while yes they're putting those anti-tracking things into Safari, that's to block Facebook, and Google's business model. The other big thing we didn't talk about, which was kind of stunning is the AR, and VR. Remember I was up at the Facebook F8 conference, which was all about Facebook camera. What I sensed was that Apple now has really woken up that their new large competitors, Google and now Facebook, have appeared on the scene very, very quickly, are actually grabbing some technical leadership.

Facebook is making a big deal of the camera platform because of the advertising that comes through it, so I think that the tracking technology and the VR and AR, is incredibly interesting. So, that's also going to be quite funny watching that play out, because what we've seen is Facebook is doing that on a cross platform way, but the advantage that Apple has is, they have access right down to Metal 2, being able to direct draw on screen. So, they can provide a fantastic performance. I thought their marketing message around, 'They bring all of these consumers to AR and VR very, very quickly', is super interesting. They don't have the advertising network that Facebook has, and Google have, where it will be where the monetization comes from. So, what's great I think is that competition drives so much innovation that it's all game on with all the four or five horseman at the moment, isn't it?

Gary: It is, and I loved the demo. So, they had a John Knoll from Industrial Light and Magic, and John Knoll, I think was one of the guys that basically built Photoshop way back a long time ago, and he's now senior effects. The guy's pretty famous at Industrial Light and Magic, on movies and things. He came on and oversaw a demo of the new augmented reality VR framework. I think it was Craig Federighi, whose one of the senior guys at Apple, said that if you actually think about your building new VR apps and AR apps, and the one they demonstrated was like a Star Wars scene generator.

The use case for that is people building kind of movies, and scenes for movies. Actually, for so long they've been building special effects for cinema, and for video, and for entertainment and games in a 2D environment, and actually you've now got an iMac that's capable of pairing this workspace for this person to go in and construct a 3D environment for a game or a movie. It's kind of like Adobe PageMaker, or Photoshop 25 years ago, you're giving this professional creative person until, and I kind of graphical UI, and of course if you're building VR experiences, then you're not going to do that in a 2D environment. You're going to do it in a 3D environment, and so, this kind of 3D augmented reality, or virtual reality toolkit that Apple are building.

On the surface of it, I think well, that's kind of pretty predictable because everybody's moving into that, but it's almost like the new desktop environment for this new world of VR's that we're building. That's when the penny dropped for me. This is like Pagemaker 30 years ago. You're giving these creative people a 3D environment to build things in and it's very logical that you would do that if you think about it that way.

Anyway, so I think it was actually a load of stuff really interesting, and we could probably talk for another hour but we should probably knock it on the head because we're over the time we had scheduled.

Rod: Very good. Super exciting. After all that, I just can't wait to buy my space gray iMac. So, they've absolutely got me with all the cool stuff they're doing, and can't wait. I think it's December those come out. So, it's a long time but I'll get one.

Gary: Yeah. I'm sure you'll, if you just spray paint the one you have at the moment.

Rod: Actually, yeah, yep for 3000 dollars, you could get it carbon wrapped or something couldn't you?